It really has become an important part of the offer process, what is the financing the proposed purchaser wants to use? Certain lower priced offers are accepted just because their financing is considered better. Better generally means more likely to close. One of the realities of bank foreclosures, leave the emotion at the door. This is why it is very difficult for the first time home-buyer to be trying to purchase in this arena without the assistance of a competent, experienced agent. In fact, if I am a buyers agent, I would make sure any owner-occupant buyer of a foreclosed property can check their emotions. If not, I would just have them read some of the realities I present in this blog regularly.
In order of what a bank will consider the best financing to the worst:
Cash
Kind of obvious and not really a type of financing. It eliminates all the financing related issues, such as appraisals and mortgage company delays. Quicker closes and less headache make cash offers king. Often a lower priced cash offer will be accepted over a much higher priced financed offer. Remember what I said about emotion? Cold hard cash rules and the fact the buyer is homeless and the house is right next door to their parents will hold zero value in having your conventional loan offer accepted over cash.
Conventional Loans
The next best because it generally reflects a higher down payment and better credit worthiness. These are key factors in avoiding some type of mortgage declination after having issued a pre-approval letter. It also importantly means their appraisal should not have a bunch of work requirements. As-is means as-is and unless it is a major surprise issue (a stolen air conditioner comes to mind) the bank is not going to make repairs so that a buyer can complete a financed purchase. Conventional financing eliminates a high proportion of that risk.
FHA Financing with No Request For Closing Costs
Two issues here. Very few bank properties pass FHA appraisal requirements. Primarily because FHA appraisers use this guideline of habitability and it seems most foreclosed homes have some issue that can be picked on by an appraiser that does not fulfill this guideline. At least this particular buyer has the cash to get through a closing, providing some hope that if for some reason the bank would decide to fix the leaky kitchen sink faucet, the buyer has enough cash to get the closing completed.
FHA Financing With Seller Requested Closing Costs
Seriously, if your buyer needs to use FHA (with their lower credit standards and low down payments) and still needs the seller to make a credit for closing costs, I would look elsewhere than a foreclosed property. The biggest issue is that most of the time the game played here is the price of the property is increased so the seller gets the same net as they would if they were not paying closing costs. The banks won’t play that game and to make your chances worse, they will likely find a better financed offer by just holding on a while longer.
VA Financing
A wonderful opportunity for those who have served our country but not a good choice to use for bank owned properties. The appraisals and condition requirements are even more stringent than FHA (this is because the buyer is not putting any money down and the lender wants the property to not require any repairs or costs to the buyer). The closing costs requested to be paid are even higher than FHA and we already discussed the issues associated with bumping a price to cover this adjustment.
These are all general guidelines. I have seen REO homes sold with VA financing, the planets need to line up just right! But they do occasionally. You just need to understand that you are playing the game with a hand tied behind your back as you go down this list for the financing offered. The market is competitive today, you need to be also. Financing proposed is the second most important term of a purchase offer (just behind price). I have seen it be the most important and price the second. It happens. Be prepared.
